California can be a great place to start a business, and the state supports small business owners.
According to Business News Daily, “California is home to more than 4 million small businesses, which employ 7.1 million people across the state. Small businesses make up 99.8% of all businesses within the state and employ 48.8% of the state’s workforce, making them a vital part of the Golden State economy.”
To launch your California business successfully, you need a plan. Fortunately, the state provides a number of resources you can use to start company operations in the State of California.
Start by thinking about your business structure.
Choosing a business structure
The type of business you choose impacts how your company profits are taxed, and the potential liability you face as a business owner.
The most common type of business entity is a sole proprietorship.
Many small business owners choose to operate as sole proprietors because this business type is simple and inexpensive to launch. You operate the new business as the sole business owner.
The IRS states that a sole proprietorship has a pass-through business structure. The owner does not file a federal tax return for the business. Instead, profits are reported on Schedule C of your personal tax return.
Operating as a sole proprietor has a downside, however. As the only business owner, you are fully responsible for all potential business liabilities. If a customer slips and falls at your office and sues the sole proprietorship, your personal and business assets are at risk.
If you choose to operate using a business name other than your surname, you need to file for a Fictitious Business NameStatement (or DBA Certificate). The term “DBA” refers to “doing business as.”
A DBA is filed with the county clerk or county recorder where the business is located.
Before you file your legal name, you need to determine if the name is available in California. Complete and submit a Name Availability Inquiry Letter to the California Secretary of State in Sacramento.
You can reserve an available business name by submitting a Name Reservation Request Form and paying the $10 fee. You need a DBA certificate to establish a business bank account and obtain a business credit card.
If you decide to start a California corporation, you must register with the California Secretary of State. An S corporation (S corp) is an attractive structure for many business owners.
State law does not determine your corporate structure. Instead, you must elect your business structure through the Internal Revenue Service. S corp owners are defined as shareholders.
The business entity can elect a pass-through status, so that the income tax on profit is posted to each shareholder’s personal tax return. S corps cannot have more than 100 shareholders, and there are other restrictions you must follow.
California also has a structure for types of businesses that provide professional services.
The United States has hundreds of professions that require a business licensing, including accountants and attorneys. If your company requires a business license, you should use the professional corporation business structure.
Some businesses choose a partnership legal structure.
If two or more people decide to become partners, they can form a general partnership.
A general partnership is a separate business entity from the individual partners, but each partner retains personal liability for partnership activities. The partners create a partnership agreement that determines ownership, profit sharing and partner responsibilities.
Federal and state taxes on profits are not reported on the partnership tax return. The IRS states that profits and losses of a partnership are taxed on each partner’s personal tax return.
California Secretary of State’s office requires partnerships to file a Statement of Partnership Authority (Form GP-1).
The limited partnership structure is different.
The partnership liability for a limited partner is typically no more than the partner’s investment. Limited partners have more liability protection than general partners.
Assume, for example, that Julie owns a $50,000 limited partnership interest in the Curbside Coffee Shop. A customer slips and falls in the shop, and sues the partnership for $3 million. Julie’s personal liability is limited to her $50,000 ownership interest.
Note the following:
- A limited partnership must have at least one general partner (GP). The GP manages the day-to-day operations of the partnership for the limited partners.
- Individuals, other partnerships and corporations can invest as limited partners.
- Limited partnerships must be formed through a partnership agreement.
To form a limited partnership in California, a Certificate of Limited Partnership (Form LP–1) must be filed with the Secretary of State’s office.
A limited liability partnership offers a slightly different legal structure for partner liability.
Limited liability partnership
If you choose a limited liability partnership (LLP) structure for your California business, you register as a general partnership.
Partners may not be liable for the debts and obligations of the partnership, if a particular act is performed by others in the partnership. If Julie is an LLP partner in the Curbside Coffee Shop and another partner is negligent, Julie may avoid personal liability.
File an Application to Register a Limited Liability Partnership (Form LLP-1) to set up your business entity.
You can also limit your liability by using a limited liability company structure.
Limited liability company
A limited liability company (LLC) is different than a corporation or a partnership.
California LLC owners are defined as members. A member can be an individual, or any type of legal entity. To create an LLC, you must file articles of organization with the Secretary of State.
There are some unique requirements for naming an LLC. The name must end with “Limited Liability Company,” “LLC” or similar language. The state provides a searchable database to verify that no other business is using a particular name.
For IRS tax purposes, an LLC is defined as an unincorporated business entity that offers a pass-through business structure. LLC profits and losses pass directly to each member’s personal tax return.
A member’s liability is limited to the value of the LLC investment.
Forming an LLC requires these steps:
- Consult with an attorney to ensure that you meet the state’s requirements for forming an LLC. The Secretary of State requires specific documentation.
- File an Articles of Organization (Form LLC-1) document with the state.
- Write a formal operating agreement. The agreement will clarify how the members do business, and help you avoid disputes. You don’t have to submit the agreement to the state, but you must keep a copy with your business records.
Meet with an attorney to discuss the pros and cons of each business structure. Getting competent legal advice is important because changing your business structure later may be difficult.
Many businesses, particularly companies that aren’t based in California, are required to select a registered agent.
California uses a system of registered agents so that customers and other businesses can contact a firm regarding legal issues. Every business, other than sole proprietorships, must have a registered agent.
Assume, for example, that a Nevada-based business hires a California registered agent in Los Angeles. If a California process server needs to serve the Nevada business, the server can visit the registered agent based in Los Angeles.
Next, you need to take action to comply with California’s tax filing requirements.
Taxes and business regulation
Start by applying for an employer identification number (EIN).
Businesses use the federal employer identification number on each tax return, and for other tax reporting documents. Your tax identification number is similar to a Social Security number for an individual taxpayer because the number is a unique identifier for tax filings.
If you select a pass-through entity as your business structure, you’ll pay income tax on company profits on your personal tax return. Other firms, such as C corps, pay business taxes using this system:
- Company files a corporate tax return and pays taxes on the profit
- The company then distributes a share of earnings as a dividend
- The owner pays income tax on the dividends received
The California Tax Service Center provides links to tax websites. Here are some California taxes that you may need to pay:
- Sales tax: You must collect and submit sales tax on certain types of customer sales. To comply with sales tax laws, review this website.
- Franchise tax: Most businesses pay a franchise tax. Check the California Franchise Tax Board site to find out more.
- Unemployment tax: The state collects taxes to fund unemployment compensation. Most California employers must also purchase unemployment insurance and workers’ compensation insurance.
- Hiring employees: You must register with the Employment Development Department (EDD) if you employ workers.
- Payroll taxes: You must withhold and submit federal and state taxes on behalf of your employees. Employers pay one-half of the FICA tax for each employee and record the payment as a business expense. FICA taxes fund both Social Security and Medicare benefits.
To understand the tax liabilities for your own business, work with a CPA who understands both federal and state tax laws.
Business owners can apply for a business license using the CalGold website.
The site lists the agencies that you must contact, based on your city (or county) and business type. CalGold provides a list of the necessary licenses you need, and the contact information for each agency.
Document all of these required tasks in a procedures manual.
A procedures manual documents each routine task that you must complete.
Your manual should include the steps required to create an invoice, ship a product and run payroll. The manual eliminates confusion about how each task is performed, and the document is a great training tool for new employees.
Once you complete all of these steps, you’re also ready to launch your business.
Launch with confidence
Before you hang up your shingle and start doing business, take one last look at your business plan. The plan should provide a step-by-step guide to launching your business.
Your business idea should address these questions:
- The problem: What problem does your product or service solve for a customer?
- Differentiation: How is your product or service different from your competitor’s offerings?
- Pricing: State why prospects are willing to pay the price you’ve selected for your product. The answer is based on your market research, competitor pricing and your knowledge of the industry.
- Revenue projections: How many unit sales do you project in the first few years? You may base this estimate on the percentage of the total market you want to capture.
Business planning helps you think through your idea completely, before you commit money to your venture. You may need to make some changes to your plan, in order to increase your chances of success.
Use the Small Business Administration website to locate the Small Business Development Center (SBDC) nearest you. An SBDC representative can review your plan and give you feedback.
Now, you’re ready to launch your business.
California is a diverse and growing state, and it may be the perfect market for your business. The state is home to hundreds of innovative firms, and you’ll find a highly educated workforce.
Follow these steps and start doing business in California with confidence.
To learn more about starting your own business, check out our complete guide.
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